Lithuania's Social Democrats face battle to keep power

VILNIUS Lithuania's ruling Social Democrats are likely to take the lead in the first round of a parliamentary election on Sunday after a campaign fought largely over Lithuania's sluggish economy.

Opinion polls show Prime Minister Algirdas Butkevicius' centre-left party is best placed to win this round. But his three-party coalition could easily be toppled by shifting alliances after a run-off on Oct. 23.

"Negotiations to form the new coalition will be very tough", Butkevicius told Reuters. "We hope to end up in the lead."

If Butkevicius loses out, the opposition centre-right Homeland Union, led by Gabrielius Landsbergis, is likely to win power. A grandson of Lithuania's first leader after independence from the Soviet Union in 1990, Landsbergis at 34 would become the youngest premier in the European Union.

Both leaders say they are the best suited to improving economic growth, which at about two to three percent is less than half of stellar rates a decade ago.

That would help to halt the flow of people out of the country. The population has shrunk to 2.9 million from 3.3 million a decade ago as Lithuanians head for richer parts of Europe.

"We are caught in a middle-income trap. The labour force is shrinking while productivity growth is almost non-existent", said Nerijus Maciulis, chief economist at Swedbank Lithuania.

Landsbergis, whose party spearheaded painful austerity reforms in the 2009 downturn, says the government has done too little to attract investment.

"We cannot just sit here waiting for investors to come. We have to go out there, we have to be active, because we are so small," he told Reuters.

Both the main parties favour increased spending on defence while keeping the state finances balanced or in surplus. Neither plans to thaw relations with neighbouring Russia after it annexed Ukraine's Crimea region in 2014.

Lithuania's outspoken president, Dalia Grybauskaite, has accused the government of failing to take up reforms and is not on speaking terms with the prime minister after alleging corruption in his government earlier this year.

"I wish (the new members of parliament) would steal less," she said after casting her vote in an early voting on Wednesday.

(Reporting By Andrius Sytas, editing by Alister Doyle, Larry King)

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